Nemak, S.A.B. de C.V. Business Report FY ended Dec. 2017

Financial Overview

(in million MXN)

FY ended Dec. 31, 2017

FY ended Dec. 31, 2016

Rate of Change (%)

Factors

Net Sales

84,779

79,244

7.0

1)

Operating Income

7,015

8,684

(19.2)

2)

Factors1) Net Sales-The Company’s sales increased by 7.0% to MXP 84,779 million in the fiscal year ended December 31, 2017. Despite slightly lower sales volumes due to decreased demand in North America, the Company’s sales increased due to higher selling prices, caused by changes in the prices of aluminum passed on to customers.

2) Operating Income-The Company’s operating income for the fiscal year ended December 31, 2017 totaled MXP 7,015 million, a decrease of 19.2% over the previous year. The decrease in operating income was due to increase in expenses combined with the increase in aluminum prices causing metal price lag, where the Company is affected by the negative consequences of the price increases without immediately realizing the effects of the prices passed on to customers.

Restructuring

-The Company announced the creation of a global organization dedicated to structural and EV components headquartered in Germany. "The Structural & EV Components is a global unit based in Germany and the main objective is to have a focus on this business that is different from powertrain, blocks, heads and transmission parts," said Armando Tamez, the Company’s president. Tamez said that the Company has received several contracts to provide structural components, engine housings and trays for lithium batteries for BMW and Daimler. In the second quarter of 2017, the Company launched a new program for Alfa Romeo from its plant in Poland and another program for the Audi Q5 SUV in Mexico. (From a Mexico-Now article on August 17, 2017)

Contracts

-The Company was awarded new contracts throughout 2017 across all of its product lines totaling approximately USD 830 million in sales.

-Since the creation of the Structural & EV Components unit, the Company has received several contracts to provide structural components, engine housings and trays for lithium batteries for BMW and Daimler. In the second quarter of 2017, the Company launched a new program for Alfa Romeo from its plant in Poland and another program for the Audi Q5 SUV in Mexico. (From a Mexico-Now article on August 17, 2017)

R&D Expenditure

R&D Structure

-The Company has ten Product Development Centers, located in Austria, Canada, Germany, Poland, Spain, China, Mexico and the U.S.

R&D Activities

-The Company’s research activities focus on enhancing vehicle efficiency through improvements to the powertrain and the vehicle’s body. Specific areas of focus include the following:Alloy Systems-High performance alloys for high powered engines-Mechanical properties and microstructural predictions-Body structural casting technologies-Thin walls in cylinder heads

-Processes such as Semi-Permanent Molding (SPM) for cylinder heads, Low-Pressure Precision Sand (LPPS) and High Pressure Die Casting (HPDC) for cylinder blocks enable the Company to operate more efficiently and manufacture higher quality products.

Capital Expenditure

(in million MXN)

FY ended Dec. 31, 2017

FY ended Dec. 31, 2016

FY ended Dec. 31, 2015

North America

3,838

4,919

3,426

Europe

3,837

4,321

2,658

Rest of World

604

924

1,169

Overall

8,279

10,164

7,253

-The Company’s capital expenditures in the fiscal year ended December 31, 2017 were primarily invested to strengthen its powertrain business and develop its new structural and electric vehicle components business.

Investments in Mexico

-The Company has invested USD 150 million in two currently operational machining facilities, and a third that is under construction in Garcia, Mexico. The investments are part of the Company’s latest strategy to create greater added value by moving from the production of engine blocks and cylinder heads to the production of structural parts and aluminum components for electric vehicles. The Company currently performs 50% of its machined work internally. The Company’s goal for 2020 is to perform 70% of machining work internally and 30% externally. (From a Mexico-Now article on December 5, 2017)

-The Company announced that it opened a high-pressure die casting (HPDC) plant located in Monterrey, Mexico. The new plant’s HPDC technology will support the production of aluminum automotive components, primarily engine blocks, transmission cases, and structural components. Additionally, the plant will feature a machining center for processing these components. Total investment into the plant is approximately USD 200 million. Series production is scheduled to begin in the first half of 2017. (From a press release on March 2, 2017)

Investments outside Mexico

-In 2017, the Company began series production at a new facility at its plant in Ziar nad Hronom, Slovakia. The new facility features high-pressure die casting technology and will focus primarily on manufacturing battery housings and structural components.

-In 2017, the Company ramped up its structural and electric vehicle components business, launching seven programs in the segment. The programs supplied models for Alfa Romeo, BMW, Daimler, and the Volkswagen Group. Six of the programs were supplied by the Company’s European operations and one by its North American operations. These seven programs accounted for approximately USD 100 million in sales for the Company.